What makes a better investment: stock market or real estate?

Without doubt, stock market investing offers an unparalleled ease. You can invest in stocks with as less as Rs 500. It can be done in the comfort of your home.

BankBazaar.com | Last Updated: December 28, 2012 16:17 (IST)

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Have you ever wondered how equity investment fares against real estate investment? There is no straightforward answer to it. We have examples of companies like ICICI Bank that rose from Rs 300+ in March 2009 to Rs 1000+ in one year. We also have example of Shamshabad (in Hyderabad) where realty prices went up multiple times in a span of few months as a result of the announcement of a slew of measures by the Andhra Pradesh government.

However, what we can do is discuss some of the points that can help us have better insight into what these investments are and what we can expect. Let’s discuss these investments on the basis of three major points.

Ease of trading Without doubt, stock market investing offers an unparalleled ease. You can invest in stocks with as less as Rs 500. It can be done in the comfort of your home. The case with real estate is different. You have to go and survey the property, inquire about the locality, and go through a lengthy process, including government regulations, to invest in it.

The similar difference is in selling. Selling of stocks is very easy while selling real estate includes a plethora of regulations, taxes and laws.

Risk-reward structure Risk-reward structure explains the rewards expected and achieved in lieu of the risk taken by the trader. There is no clear winner in this. The risk of losing money is there in the market as well as real estate. The reward is also very satisfying ion both forms of assets.

What differentiates real estate, however, is its utility even when the prices slump to a very low level. Investors can still use their property to live, rent, or earn residual income. The same cannot be said of stocks. Unless the business behind the stock rebounds, it will end up in loss for investors.

The kind of financial leverage (buying on loan) that real estate provides is unique across asset classes. A shrewd investor can use the leverage very effectively to make good money. However, despite the leverage, real estate cannot be termed as better investment than stocks. There is no conclusive evidence.

Investing choices available Investing choice is the set of options for investors to choose from. In case of real estate, the choices are limited. It can be either in land or building. The building could be residential or commercial property. In case of equity investment, the choices are more varied and offer more choices to investors with a different risk profile. There have been discussions about introducing real estate investment trusts but no decision has been taken as yet. If this materializes, investors will have another good avenue for real estate investment.

Investors can invest in individual securities of companies. They can also invest in index funds that track indices such as Sensex, Nifty, Nifty Junior, sector indexes, etc. The third way is to invest in equity-oriented mutual funds and fund of funds that invest in equities. All these funds are offered by fund houses with a competent fund manager handling them.

Conclusion Real estate and equities, both are a great source of investment and help build wealth in the long term. Success in investing in these assets depends on the knowledge of the asset, inclination and attitude of individual investors, and understanding the key drivers of prices of these assets.

It is advisable for investors to understand the various factors mentioned in this article and do more research to be able to judge the option more suited to the individual investing style.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.